Hey man I just saw a smoking hot deal on a number of home foreclosures. Have you ever heard this from a friend or relative? All too often potential buyers of a foreclosed property in BC think “Here comes a good deal”. The fact of the matter is that buying a foreclosed property requires a higher level of diligence on the part of a prospective buyer than many other homes for sale. Why you ask?
The word foreclosure means to deprive a borrower (in defalt) of the right to redeem the mortgaged property. The sales of foreclosed properties differ from normal house sales in a number of ways. The failure of a borrower to make mortgage payments as required is called Mortgage Default and this failure allows the lender to take legal action to protect their security. The most common remedy used by lenders is called foreclosure which can be an expensive and time consuming process. Once a property is subject to foreclosure proceedings, anyone who may be potentially affected by the action may apply to the court for Conduct of Sale. Most often this is the lender who makes this application and it allows the court to instruct that the property be listed for sale by the court (a Judicial Sale) and it prevents anyone else from listing the property.
The marketing of a home foreclosures by Judicial sale proceeds in much the same way as other non-foreclosure situations but when an offer is received the listing Realtor passes the offer to the lender’s representative who will at some point bring the offer to the court for consideration. Other people may attend court for the hearing of the Order Approving Sale and be given an opportunity to present a bid to the court. The vast majority of foreclosure applications are heard by Masters rather than Judges. Masters can only approve subject free offers.
Offers on foreclosures must include a Schedule A. The schedule A is a document that contains a clause confirming that the lender’s obligation is limited to bringing an offer before the court for consideration. Schedule A’s generally contain a number of clauses in them and they override and/or amend some of the standard clauses in a contact such as INCLUDED ITEMS (currently paragraph 7) and VIEWED (currently paragraph 8). Para 7 is deleted and Para 8 is deleted. Property in foreclosure actions is purchased “as is where is” and the buyer takes what they get on the possession date and there is no guarantee that the property will be in the same condition on the possession date as it was on the day it was viewed by the buyer. As is where is means that the buyer is accepting the property as it is and where it is on the completion date of the sale with no representations or warranties whatsoever as to the condition of the property.
In a normal non-foreclosure listing, sellers are asked to fill out a Property Disclosure Statement by answering a number of questions about the property for sale. In a foreclosure, there will be no PDS and the Schedule A often contains a clause which reads “The purchasers expressly agree that neither the seller nor its agents or representatives have any liability, responsibility, duty or obligation to disclose to the purchasers any information or knowledge that they have with respect to the condition of the lands and premises or any latent or patent defects thereto.”
In some circumstances, the lender may seek can seek an Order Absolute from the court which results in the lender becoming the new registered owner of the property. In this circumstance the lender can deal with the property as the registered owner and keep any profit upon sale of the property.
What is the borrower’s mortgage was insured? Let’s assume that the Conduct of Sale Order is made and that the property is listed as a Judicial sale. If, after a certain period of time, the property remains unsold, the insurer will take title to the property and pay the mortgage lender the amount of its mortgage. The lender then assigns its judgement (obtained at the Order Nisi hearing) to the insurer and the insurer works to sell the property.
When there is a tenant in a house that is in foreclosure, there is an added complexity. Tenant’s rights are protected by the Residential Tenancy Act and no court order is enforceable against a tenant unless the tenant is made a party to the proceedings. If the tenant is not named as a party to the foreclosure action, the Real Estate Services Act continues to apply. Section 38(2) deals with tenant eviction.
What about home insurance? Insurance companies often consider houses in foreclosure as a special risk and a buyer will likely not be able to obtain insurance on a foreclosed property until the day title is transferred to the buyer. It is possible that an insurance agent will decline to give the buyers insurance. As well, many insurance policies contain a clause excluding coverage for damage caused by a tenant.
This short blog just scratches the surface on home foreclosures and property foreclosures. Buying a home can be a stressful experience for home buyers. With foreclosed property sales, there is generally increased risk and uncertainty to the buyer, longer wait times for responses to offers, higher deposits, increased uncertainty in dates such as completion and possession, and longer waits for possession. At the end of the day, the sale price may not be, and quite often is not, the deal that many buyers are expecting.